Vanchip (Tianjin) Technology (SHSE:688153) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Vanchip (Tianjin) Technology Co., Ltd. (SHSE:688153) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Vanchip (Tianjin) Technology

What Is Vanchip (Tianjin) Technology's Net Debt?

As you can see below, at the end of March 2024, Vanchip (Tianjin) Technology had CN¥102.0m of debt, up from CN¥98.1m a year ago. Click the image for more detail. But it also has CN¥2.83b in cash to offset that, meaning it has CN¥2.73b net cash.

A Look At Vanchip (Tianjin) Technology's Liabilities

We can see from the most recent balance sheet that Vanchip (Tianjin) Technology had liabilities of CN¥568.0m falling due within a year, and liabilities of CN¥54.1m due beyond that. Offsetting this, it had CN¥2.83b in cash and CN¥454.9m in receivables that were due within 12 months. So it can boast CN¥2.66b more liquid assets than total liabilities.

This short term liquidity is a sign that Vanchip (Tianjin) Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vanchip (Tianjin) Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Vanchip (Tianjin) Technology turned things around in the last 12 months, delivering and EBIT of CN¥62m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vanchip (Tianjin) Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vanchip (Tianjin) Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Vanchip (Tianjin) Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Vanchip (Tianjin) Technology has net cash of CN¥2.73b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥187m, being 300% of its EBIT. So is Vanchip (Tianjin) Technology's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Vanchip (Tianjin) Technology has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.